Diva Footwear is contemplating if it should continue producing platform shoes. The following information is available for the company's segments. $\begin{array}{lrrr}&\text { Platform Shoes}&\text { Athletic Shoes}&\text { Boots }\\hline
\text { Sales } & \$ 120,000 & \$ 420,000 & \$ 360,000 \
\text { Variable costs } & 64,000 & 220,000 & 140,000\
\text { Contribution margin } & 56,000 & 200,000 & 220,000 \
\text { Direct fixed costs } & 45,000 & 70,000 & 90,000 \
\text { Allocated fixed costs } & 20,000 & 70,000 & 60,000\
\text { Net income }&(\$9,000)&\$60,000&\$70,000
\end{array}$ If platform shoes are dropped, what effect will occur to Diva Footwear's net income?

Question

Quizplus · Accepted Answer

If platform shoes are dropped, the company will save $45,000 in direct fixed costs and $20,000 in allocated fixed costs, for a total of $65,000. However, the company will also lose $56,000 in contribution margin from platform shoes. Therefore, the net income will decrease by $11,000 ($65,000 - $56,000).

Diva Footwear Is Contemplating If It Should Continue Producing Platform